A home loan overdraft facility is a type of loan where you can borrow money against your home loan and use it as an overdraft. It can be a good financial tool for some people, depending on their individual circumstances and financial goals. If you have surplus funds, you can park them as an overdraft and get the interest on your home loan reduced. However, the surplus funds deposited in the overdraft account will not yield any interest.
An overdraft facility acts like your bank account where you can deposit and withdraw funds as per your requirements. It is beneficial to overcome any immediate financial emergency without tempering your existing investments. When you deposit extra funds in the home loan account over and above the EMI, it is treated as the home loan prepayment. It helps you reduce the interest outgo and the outstanding balance.
However, before availing an overdraft facility, always compare the interest rates and repayment tenure and withdraw what is required. There is no interest charged if you don’t withdraw the overdraft amount. The interest rate on an overdraft facility is higher, so make sure you pay back on time what you borrow.
Adhil Shetty, CEO, Bankbazaar.com, says, “For example, if you have a home loan of Rs 50 lakh and an overdraft limit of Rs 10 lakh, you can withdraw up to Rs 10 lakh from your home loan account as and when you need it. Interest will only be charged on the amount you withdraw and not on the full Rs 10 lakh.”
Here are some pros and cons of a home loan overdraft facility:
Pros of a home loan overdraft
Flexibility: The overdraft facility gives you the flexibility to use the funds as and when required, and you only have to pay interest on the amount used.
Lower interest rates: The interest rates on an overdraft facility are typically lower than those on personal loans or credit cards. That is why this fund is like the money in your savings account which you can withdraw whenever you need it.
EMI savings: The overdraft facility allows you to park your extra funds in your home loan account and reduce your interest outgo. This can result in savings on your EMI. These days when the interest rates have already peaked and are likely to increase further, the OD facility can save a good amount of interest on your existing home loan.
Cons of a home loan overdraft
Limited availability: It is important to check with your lenders as not all lenders offer an overdraft facility on their home loans. So, it may not be available to you.
Higher fees: Lenders may charge higher fees for the overdraft facility, including setup fees, annual fees, and transaction fees.
Temptation to overspend: The overdraft facility may tempt you to overspend and borrow more than you need, leading to a larger debt burden.
Risk to collateral: Overuse of the overdraft facility can increase the risk of default on your home loan, which may lead to the lender selling your property to recover the debt.
A home loan overdraft facility can be a useful financial tool if used wisely, but it is important to consider the pros and cons carefully before deciding whether to use it. An overdraft facility should be availed only if you have surplus funds available for prepayment. Otherwise, the interest rate can increase the cost of your home loan and you might have to repay the loan over a longer tenure.
- Before availing an overdraft facility, compare the interest rates and repayment tenure. Overuse can increase the risk of default
- Funds in home loan account over and above the EMI is treated as home loan prepayment
- It is useful for people who have fluctuating incomes